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Economics Review > Paper 2 questions > Flashcards

Paper 2 questions Flashcards

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1
Q

Advantages of the market mechanism in a mixed economy

A

Decisions are made by individual consumers and individual producers who act in their own self interest
Resources are allocated by a price mechanism without need for government intervention

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2
Q

Disadvantages of the market mechanism in a mixed economy

A

Some products are under provided and under consumed while some are over produced and over consumed
Some products will not be provided

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3
Q

Advantages of government intervention in a mixed economy

A

Government intervention in resource allocation can take decisions in the national interest
The government could create a more equitable distribution of income

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4
Q

Disadvantages of government intervention in a mixed economy

A

Government control could lead to inefficient resource allocation
Lack of competition or profit motive could lead to products of lower quality

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5
Q

Advantages of a planned economy

A

Efficient resource allocation for societal goals
Reduction of inequality
Stability and control over the economy
Full employment
Avoidance of wasteful competition
Focus on long term sustainability

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6
Q

Disadvantages of a planned economy

A

Lack of consumer choice
Inefficiencies and lack of incentives
Bureaucratic inefficiencies
Limited individual freedom
Shortages and surpluses
Corruption and abuse of power
Lack of competition may lead to allocative inefficiency

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7
Q

Advantages of a mixed economy

A

Balance between efficiency and welfare
Private sector innovation
Government to correct market failure
Social safety net
Economic stability

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8
Q

Disadvantages of a mixed economy

A

Over reliance on government intervention
Potential for government failure
Higher taxes and government spending
Income inequality
Politician influence and lobbying

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9
Q

Benefits of providing healthcare free of charge

A

Addresses affordability or inequality in access, insurance and information gaps
Avoids loss of output resulting from absent workers
Resources are prioritised to need rather than profit

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10
Q

Disadvantages of providing healthcare free of charge

A

Shortages which increase costs to governments
Private firms may be more efficient at providing healthcare
Opportunity cost of government spending

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11
Q

Consequences of businesses using YED

A

Can classify goods as normal or inferior to show which types of good to produce
Less useful for pricing decisions
Based on historical data which may be inaccurate

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12
Q

Consequences of businesses using PED

A

Can measure impact of price changes
Based on historical data which may be inappropriate in a time of economic growth and rising incomes

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13
Q

Factors affecting PES

A

Number of producers
Existence of spare capacity
Ease of storing stocks
Time periods
Extent of factor mobility
Length of production processs

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14
Q

Minimum wage evaluation

A

A minimum wage set above equilibrium should increase the incomes of those on the lowest levels and possibly ensure that poverty is reduced. If all income levels increase this will not have a redistributive effect. It will not impact the self-employed. It may lead to unemployment and more poverty leading to less redistribution if businesses cannot afford the higher rates

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15
Q

Progressive tax evaluation

A

Those on higher income may have the ability to reduce their tax burden or may leave the country. It also reduces the incentive to earn more

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16
Q

Limitations of improved information

A

Habitual consumption
Peer pressure
Irrational behaviour

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17
Q

Benefits of an increasing rate of inflation

A

Stimulates output if due to existing demand since firms feel optimistic about the future and investment is encouraged to expand their business
Reduction in debt burden if inflation is rising faster than nominal interest

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18
Q

Costs of an increasing rate of inflation

A

Reduction in net exports as international competitiveness is reduced
Fiscal drag into higher tax brackets if not increased with inflation

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19
Q

Monetary policy evaluation to improve the current account

A

Higher interest increases the cost of debt and leave people with less money, reducing their consumption of imports, improving the current account
An increase in interest attracts hot money flows causing an appreciation in the exchange rate. This makes exports less competitive and imports more attractive. Assuming demand is relatively elastic, this will worsen the current account

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20
Q

Consequences of a balanced budget

A

Stability
May encourage domestic and inward investment
May not be flexible enough to deal with changing economic conditions

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21
Q

Consequences of a budget deficit

A

May enable economic growth
May reduce unemployment
Unsustainable in the long run

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22
Q

Consequences of a budget surplus

A

May be necessary to solve inflation
Opportunity cost due to spending

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23
Q

Advantages of a current account surplus

A

A country will have a surplus foreign exchange which it could use to invest in other countries
A high level of exports could lead to an increase in jobs in the export sector
Lower spending on imports may mean that people are buying more domestic goods which could also increase employment
It could stimulate economic growth

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24
Q

Disadvantages of a current account surplus

A

Could be a sign of weak domestic demand with lower consumer spending and could reduce domestic employment
Could lead to lower economic growth
The surplus could have been caused by a recession in the economy
It can contribute to lower output and employment in those countries with a current account deficit

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25
Monetary policy evaluation
Can be implemented quickly Doesn't directly increase public debt May lead to inflation Can cause liquidity trap
26
Expansionary fiscal advantages
Direct effective in short term Leads to higher output and job creation
27
Expansionary fiscal disadvantages
Increased government debts and deficits Inflation Crowds out private investment
28
Advantages of free trade
Efficient resource allocation of resources due to specialisation and comparative advantage An opportunity to take advantage of different factor endowments Competitive pressure to keep costs down, increase efficiency and lower prices for consumers Higher output, economies of scale and increased choice and availability for consumers
29
Disadvantages of free trade
Overexploitation of resources Closure of domestic industries and problems for developing industries leading to unemployment particularly in a developing economy Dumping and unfair competition
30
Protectionism impact on terms of trade
Protectionism can worsen the terms of trade by reducing import volumes and export demand. Tariffs increase import prices, reducing terms of trade but may improve them if domestic producers are encouraged to invest and build up demand and increase export prices
31
Benefits of economic growth
High incomes Reduction in unemployment Improved government finances Increased international competitiveness Increases in consumer and business confidence Increased life expectancy
32
Costs of economic growth
Inflation Current account deficits Inequality Pollution
33
Assess whether the effects of a currency appreciation on the terms of trade will benefit all industries
Terms of trade is a ratio of average export prices to average import prices Impact of appreciation makes exports more expensive and imports less expensive
34
Explain how a PPC can be used to show the concept of opportunity cost
A movement along the curve involves a reallocation of resources as resources as shifted between the two types of product, there is an opportunity cost involved measured by a sacrifice of one product as more of another are produced
35
Consider whether opportunity cost is likely to remain constant if resources are reallocated from the agriculture sector to the industrial sector
Those resources least suited to agriculture will be redeployed first so there will be low opportunity costs so opportunity costs will always rise as resources are increasingly reallocated from agriculture to industrial uses
36
Consider which determinants are most important in determining the size and sign of the XED coefficient
XED is positive for substitutes and negative for complements. The closer the relationship between two products the greater the magnitude of the value of XED
37
Explain what is meant by equilibrium in a market
Where the quantity demanded equals the quantity supplied and there is no tendency to change in a market
38
Consider the extent to which the equilibrium price and equilibrium quantity are likely to change for a product following an increase in the wages for labour across the whole economy
Demand curve will be expected to shift right or left depending on the nature of the product. Left if inferior and right if normal The supply curve will be expected to shift to the left which impacts price depending on whether demand is price elastic or inelastic and quantity supplied depending on whether supply is elastic or inelastic, use of buffer stocks and the effects of improved productivity
39
Consequences of a persistent current account deficit on the domestic economy
Employment Economic growth Inflation Living standards Government budget Business confidence Need to restructure the economy
40
Consequences of a persistent current account deficit on the external economy
Exchange rates Ability to trade Need for imports Debt interest
41
Benefits of using PED for a smartphone producers
Raising or decreasing prices of maximise revenue
42
Limitations of using PED
Figures are only estimates and may change over time
43
Benefits of using XED for a smartphone producers
To determine whether it is a complement or a substitute for a product produced by a different business to enable it to react to competitor pricing decisions
44
Limitations of using XED
Other factors may have a greater influence such as brand loyalty to a competitor
45
Advantages of a subsidy for mass transit systems
It can be considered a merit good that helps lower income families Improves labour mobility Reduces road congestion Improves air quality Reduces the use of private cars which may be considered to be a demerit good
46
Disadvantages of subsidies
Opportunity cost Poor decisions as a result of information failure Government inability to provide funding
47
Explain the meaning of negative economic growth
A decrease in national income or output measured by GDP or GNP
48
Drawbacks of using monetary policies for HICs to produce an economic recovery
Expansionary monetary policy may cause inflation It depends upon consumer and business confidence and receptiveness towards reductions in interest rates Effects on the cost of imports due to a fall in the exchange rate Impact of time lags
49
Explain how a products price acts as a signal of its scarcity
There are limited resource to satisfy unlimited wants and needs so price rations the available resources among competing buyers Rising demand for a product relative to supply will push up prices and act as an incentive to increase the quantity. Scarcity gives rise to the need to make choices between the different uses that can be made of scarce resources
50
Explain how an effective minimum price would affect the market for a basic food
A price floor is established Needs to be above equilibrium to be effective Equilibrium price would be higher than if there was no government intervention Suppliers are guaranteed these prices Has a positive effect on their incomes Could lead to excess supply and the possibility of food rotting in warehouses
51
Consider how government use of buffer stocks may help the workings of the price mechanism
It can help to stabilise a market Stocks can be used to smooth fluctuations in the price of a commodity reducing large price variations A government could buy stocks when there was an excess supply of a product in the market A government could sell stocks when there was an excess demand for a product in the market
52
Consider how government use of buffer stocks may not help the workings of the price mechanism
Could distort the market by not allowing prices to reflect changes in the conditions of demand and supply of a product May not allow for the functions of the price mechanism
53
Advantages of establishing a maximum price in a market in the form of a price ceiling
The price will be lower than what would otherwise be the case if there was no government intervention This would lead to a lower rate of inflation This helps the poor afford necessities including essential food, rents and transport
54
Disadvantages of establishing a maximum price in a market in the form of a price ceiling
Lower prices could stimulate demand-pull inflation The creation of a shortage as a result of excess demand Hoarding Illegal markets which can change high prices Queuing or rationing If controls are not effective it will not control inflation
55
Definition of a floating exchange rate system
One in which the exchange rate is determined by the intersection of the demand for a currency and the supply of a currency or not fixed by the government
56
Factors that could bring about a depreciation in the value of a country's exchange rate in a freely floating exchange rate system
A decrease in the demand for a current if fewer exports are sold An increase in the supply of a currency is more imports are bought Lower interest rates A higher rate of inflation compared with trading competitors because exports will be less competitive A deficit in the balance of payments on current account will contribute to a depreciation
57
Advantages of protectionist policies
Tariffs make imports more expensive and discourage their consumption Quotas would restrict the volume of imported products Embargoes would place a complete ban on certain imports Excessive administrative burdens make it more difficult to get products Export subsidies make domestic products more price competitive in international markets
58
Limitations of protectionist policies
Tariffs may not be very effective if demand for imports is relatively price inelastic Some quotas may not be that restrictive An embargo could lead to retaliation There may be ways of getting round the excessive administrative burdens Effect of export subsidies depends on the PED for the products and could also lead to retaliation
59
Advantages of supply side policies
Lower taxes could encourage people to become entrepreneurs Higher expenditure on education and training could improve the quality of enterprise, making entrepreneurs more innovative and more willing to take a risk Deregulation could lead to laws being reduced to make the setting up of an enterprise easier Financial support from the government would enable more enterprises to survive and to stay in business
60
Limitations of supply side policies
The effects can take a long time to show Some entrepreneurs might become too dependent on government support and so become inefficient The policies will not guarantee that all enterprises will be successful A policy of privatisation might actually reduce the quantity of enterprise needed Questionable if enterprise can be taught
61
Factors affecting PED
The availability and price of substitutes The price of the product relative to income (could change over time as incomes rise) Loyalty Need or want Time period
62
Usefulness of knowledge of PED
The businesses will be able to predict the effect of a change in the price on demand relatively accurately If demand is price elastic a fall in price increases revenue If demand is price inelastic a fall in price decreases revenue If PED is unitary elastic a change in price will not change revenue
63
Usefulness of knowledge of YED
Business will benefit from knowing about the effect of changes in income in an economy Will enable the business to plan for the future and have the resources to meet future demand Increase in income in an economy may lead the business to produce better are more luxurious products with more features

Economics Review (9 decks)

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